IFRS 16 Briefing 2 July 2019 Agenda Overview IFRS 16 recap - PowerPoint PPT Presentation

IFRS 16 Briefing 2 July 2019

Agenda • Overview • IFRS 16 recap • Impact summary • Q&A

Overview • No change to how we run the business • Predominantly freehold business, own 86% of stores • Impacts on financial statements - balance sheet, income statement and cash flow classification • No impact on balance sheet principles, capital allocation framework or dividend policy • An accounting change only - no impact on cash flow • Balance sheet – Increase in liabilities – Net debt includes lease liabilities – Right-of-use assets recognised • Profit before tax and exceptionals 1 and EPS before exceptionals 2 impacted, as previously guided 1 Defined as profit before tax, exceptional items and net pension interest 2 Profit before exceptional items and net pension interest, adjusted for a normalised tax charge

IFRS 16 recap • Effective for the Group for the 52 weeks ending 2 February 2020 • We are adopting the fully retrospective transition approach: – As if IFRS 16 has always been applied – Comparatives restated – Most consistent and comparable approach • Significant change to balance sheet: – Lease liabilities recognised for operating leases – Recognition of associated right-of-use assets – Adjustment to opening reserves • Income statement impact: – Straight line rental cost replaced by depreciation and interest – Shape of income statement changes – profit before tax and EPS decrease, operating profit and operating margin increase – Different profile of income statement charge over lease life • Discount rate and lease length assumptions are lease specific

Impact summary – 2018/19 • The financial impact on the restated 2018/19 balance sheet is: – Recognition of right-of-use assets £745m 1 – Recognition of lease liabilities £1,397m – De-recognition of onerous provisions £272m 2 – Recognition of deferred tax assets £69m – Adjustment to opening retained earnings £306m • The impact on the restated 2018/19 income statement is : – Profit before tax and exceptionals 3 lower by £10m, as previously guided • Dividend policy remains unchanged 1 Net of amounts reclassified from Property, plant and equipment and impairment of right-of-use assets 2 Provisions for onerous contracts and amounts provided for onerous commitments 3 Defined as profit before tax, exceptional items and net pension interest

Restated balance sheet – as at 3 February 2019 £m 1,206 69 5 272 (461) (1,397) £745m recognition of right- 4,631 of-use assets net of 4,325 impairment FY19 Net assets Recognition of De-recognition of Recognition of Impairment of Recognition of Other FY19 Net assets (reported) lease liabilities onerous lease right-of-use right-of-use deferred tax (restated) and amounts assets assets balances provided for onerous contracts

Summary balance sheet – as at 3 February 2019 £m Reported 2019 IFRS 16 impact Restated 2019 Non-current assets Property, plant and equipment 7,312 (218) * 7,094 Sum of marked items (*) equivalent to £745m Right-of-use assets - 929 * 929 right-of-use assets net of impairment 34 * Investment property 26 60 Other non-current assets 1,196 8 1,204 8,534 753 9,287 Current assets and assets held-for-sale 1,382 (3) 1,379 Current liabilities Creditors (3,085) 15 (3,070) Lease liabilities - (69) (69) Other current liabilities (210) - (210) (3,295) (54) (3,349) Non-current liabilities Lease liabilities - (1,328) (1,328) Other non-current liabilities (1,154) - (1,154) Deferred tax liabilities (483) 69 (414) Provisions (353) 257 (96) (1,990) (1,002) (2,992) Net assets 4,631 (306) 4,325 Net Debt (997) (1,397) (2,394)

Restated income statement – 3 February 2019 £m 103 (58) (55) 406 396 Profit before tax and Rent Depreciation on right-of- Finance costs Profit before tax and 1 1 exceptionals (reported) use assets exceptionals (restated) 1 Defined as profit before tax, exceptional items and net pension interest

Income statement (pre exeptionals) IFRS 16 Impact Finance Restated £m Reported 2019 Rent Depreciation Notes costs 2019 Revenue 17,735 17,735 Operating costs (16,713) (16,713) Rent costs removed, other than short-term Operating lease rental (114) 103 (11) and/or low value leases Depreciation and amortisation (443) (58) (501) Depreciation on right-of-use assets Operating profit before exceptionals 465 103 (58) - 510 Operating margin % 2.6% 2.9% Up 25 bps Profit from JV 1 1 Net finance costs before exceptionals (60) (55) (115) Increase due to interest on lease liabilities Profit before tax and exceptionals 1 406 103 (58) (55) 396 Down £10m as previously guided Basic EPS before exceptionals 2 13.17p 12.85p Down in line with profit before exceptionals 1 Defined as profit before tax, exceptional items and net pension interest 2 Profit before exceptional items and net pension interest, adjusted for a normalised tax charge

Summary cash flow statement £m Reported 2019 IFRS 16 Impact Restated 2019 Cash flows from operating activities Profit for the period 244 (11) 233 Net finance costs 75 55 130 Taxation charge 76 (6) 70 Share of profit of joint venture (net of tax) (1) - (1) Operating profit 394 38 432 Adjustments for: - Depreciation and amortisation 443 58 501 - Net impairment (55) 53 (2) No impact on - Profit/loss arising on disposal and exit of properties (2) 2 - cash flow - Other adjustments 55 - 55 - Working capital 7 (16) (9) Cash generated from operations 842 135 977 Interest paid (54) (66) (120) Taxation paid (76) - (76) Net cash inflow from operating activities 712 69 781 Net cash outflow from investing activities (431) - (431) Net cash outflow from financing activities (344) (69) (413) Net decrease in cash and cash equivalents (63) - (63) Cash and cash equivalents at start of period 327 - 327 Cash and cash equivalents at end of period 264 - 264

ROCE • Significant change to balance sheet and income statement Pre IFRS 16 Basis 7.9% means a different definition and calculation of ROCE 8.0% 7.7% 7.8% • Prior calculation, based on 10 times lease multiplier, 7.6% 7.3% 7.4% replaced by IFRS 16 lease liability 7.2% 7.0% • Same trend under new and old measures 2016/17 2017/18 2018/19 Post IFRS 16 Basis 6.9% 7.0% 6.7% 6.8% 6.6% 6.3% 6.4% 6.2% 6.0% 2016/17 2017/18 2018/19

Debt metrics 2018/19 Pre IFRS 16 Post IFRS 16 Net debt (£m) 997 2,394 Lease adjusted net debt 1 : EBITDAR 2.1x - - Net debt : EBITDA 2.4x Prior calculation, based on 10 times lease multiplier, replaced by IFRS 16 lease liability

Q&A